Belgium - Economic Outlook June 2020

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Belgium In case of a second pandemic wave later this year (the double-hit scenario), the contraction of GDP in 2020 is set to reach about 11%, but close to 9% if there is no further outbreak (the single-hit scenario). In both cases, GDP is projected to remain well below the pre-crisis level in end-2021. The recovery will be much weaker in the double-hit scenario due to larger permanent income and employment losses, as well as much weaker financial position of businesses, weighing further on consumption and investment.

To avoid a resurgence of the pandemic, public authorities need to lift the confinement measures carefully, together with adequate controls on activity and an active strategy to test, trace and treat people. Smooth coordination between the different levels of government in the federal state is essential. While expanding the temporary unemployment scheme as much as necessary, the government should consider strengthening targeted support to viable businesses facing temporary liquidity shortages, including through better channelling a huge rise in household saving, in order to prevent massive bankruptcies.

The pandemic has been contained The first COVID-19 cases were confirmed in early March and infections spread rapidly thereafter. The number of new confirmed cases reached its peak in early April, while the number of hospitalisations has declined by more than 80% since then. The healthcare system has coped well with the rising number of patients, especially those in intensive care in hospitals, while people in nursing homes were relatively more affected. So far, the government has provided additional resources in the form of a cash advance to hospitals (0.2% of GDP).

Belgium COVID-19 will have significant consequences for economic activity Index 2019Q4 = 100, s.a.

105

Employment losses will be long lasting

Real GDP

Unemployment rate

Single-hit scenario

Single-hit scenario

Double-hit scenario

Double-hit scenario

% of labour force 11 10

100

9 8

95

7 90

6 5

85

4 80

2019

2020

2021

0

0

2019

2020

2021

3

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934139024

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

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Belgium: Demand, output and prices (double-hit scenario) 2016

Belgium: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1,2 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation3 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

Current prices EUR billion

430.2 221.1 100.1 99.9 421.1 4.0 425.1 341.6 336.5 5.1 _ _ _ _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2015 prices)

1.9 1.8 0.0 1.3 1.3 -0.1 1.2 5.3 4.4 0.7

1.5 1.5 1.0 4.0 2.0 0.3 2.2 1.2 2.1 -0.7

1.4 1.1 1.8 3.2 1.8 -0.4 1.3 1.1 1.0 0.1

-11.2 -15.8 -0.4 -20.4 -13.3 0.3 -12.7 -11.7 -13.6 1.5

3.4 6.5 -0.3 6.4 4.6 0.1 4.7 3.3 4.9 -1.2

1.7 1.5 1.5 0.5 0.1 2.2 2.3 1.2 0.3 0.2 1.5 1.3 1.5 0.9 0.4 7.1 6.0 5.4 8.2 9.3 -0.7 -0.8 -1.9 -11.0 -8.3 120.6 118.5 121.6 143.2 147.8 101.8 99.9 98.7 120.3 124.9 1.2 -1.4 -1.2 0.3 -1.0

1. Contributions to changes in real GDP, actual amount in the first column.

2. Including statistical discrepancy. Statistical discrepancy contributes to 5.3% in 2019 percentage changes.

3. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137295

The government introduced a nation-wide lockdown in mid-March. Citizens were required to stay at home, except for work and buying daily necessities. At the same time, non-essential shops and retail outlets were closed, while firms were obliged to close temporarily unless they could organise telework or ensure social distancing. These measures have been lifted sequentially from early May, while activities that require strong controls on the size of gathering are not allowed to reopen yet.

The economy has been hit hard Economic activity has declined sharply since the nation-wide lockdown. Sales have declined by around one-third on average over the past several weeks. The decline in sales has been particularly severe in sectors such as restaurants and accommodations, with declines of more than 80%. In the projections, economic activity is estimated to have decreased by around a quarter during the lockdown compared to a normal period. Business sentiment has declined markedly, primarily in service sectors, while around 65% of businesses have postponed their investment plans. Currently, a quarter of all employees are on temporary unemployment. Consumer confidence has also declined markedly, while a quarter of households have incurred a loss of at least 10% of their income since the lockdown.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

146 _

Belgium: Demand, output and prices (single-hit scenario) 2016

Belgium: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1,2 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation3 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

Current prices EUR billion

430.2 221.1 100.1 99.9 421.1 4.0 425.1 341.6 336.5 5.1 _ _ _ _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2015 prices)

1.9 1.8 0.0 1.3 1.3 -0.1 1.2 5.3 4.4 0.7

1.5 1.5 1.0 4.0 2.0 0.3 2.2 1.2 2.1 -0.7

1.4 1.1 1.8 3.2 1.8 -0.4 1.3 1.1 1.0 0.1

-8.9 -12.5 -0.9 -15.9 -10.6 0.3 -10.0 -9.1 -10.5 1.1

6.4 10.0 0.2 11.8 7.9 0.0 7.8 7.0 8.8 -1.2

1.7 1.5 1.5 0.5 0.5 2.2 2.3 1.2 0.4 0.7 1.5 1.3 1.5 1.0 0.8 7.1 6.0 5.4 7.4 6.5 -0.7 -0.8 -1.9 -8.6 -3.8 120.6 118.5 121.6 138.2 135.3 101.8 99.9 98.7 115.3 112.4 1.2 -1.4 -1.2 -0.1 -1.4

1. Contributions to changes in real GDP, actual amount in the first column.

2. Including statistical discrepancy. Statistical discrepancy contributes to 5.3% in 2019 percentage changes.

3. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934137314

Well-targeted policy measures provide an effective stimulus The federal government prepared a fiscal package of 1.7-2.1% of GDP in March, which mainly consists of deferrals of tax and social security payments, along with some direct income support measures. Benefits for those on temporary unemployment were increased and the so-called “replacement income” for the self-employed has been introduced, which together with compensations for businesses by regional authorities, are estimated to provide a stimulus of around 1% of GDP. The federal government and the financial sector introduced a guarantee scheme for new credits and credit lines of 10.7% of GDP, which may worsen the public finances further in the future if guarantees are called. The central bank has eased a number of prudential measures, including the removal of the counter-cyclical capital buffer. Also, the authorities made it possible to defer the repayment of credits for viable firms and the self-employed until end-September 2020.

The recovery will be delayed if the pandemic resurges The economy is projected to be significantly affected by the pandemic. If the pandemic resurges, the already weakened economy would be less able to absorb another shock, increasing hysteresis effects. In both scenarios, the temporary unemployment measures would initially prevent massive employment losses. However, such schemes cannot be permanent and the unemployment rate will increase, in particular in the double-hit scenario, reaching historically high levels. Investment will recover only gradually, due to squeezed profits and heightened uncertainty, particularly in the double-hit scenario. Private OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

_ 147 consumption will not recover strongly as households will be cautious to increase spending, resulting in a high saving ratio in both scenarios. With subdued demand, inflation will be very low in the two scenarios (0.7% and 0.2% in 2021). Public debt (Maastricht definition) will reach 112.4% of GDP and 124.9% of GDP by 2021 in the respective scenarios, undermining the consolidation achievements since the global financial crisis.

There are significant downside risks, since 27% of businesses report liquidity problems at a three-month horizon and 8% of businesses perceive solvency problems. On the upside, a faster exit from the pandemic than expected could lead to a stronger rebound.

Additional policy action may be needed In order to prevent a massive rise in unemployment, as well as bankruptcy and impairment to the financial system, the government can extend the guarantee scheme to refinancing credits, or even provide bridging loans directly as already done by some regional authorities. In doing so, it needs to target otherwise viable firms facing short-term liquidity problems; some 7% of SMEs and 3% of large companies were already at the highest risk of default due to their indebtedness and low repayment capacity before the crisis. In order to help ensure a strong recovery, the government may consider a way to channel the significant rise in private savings, for instance, by strengthening tax credits for investment in SMEs. The government should avoid introducing a regressive tax measure such as a reduced VAT rate for restaurants and the accommodation sector, which should be aided instead by increasing compensations already provided by regional authorities if necessary. The different governments should also increase investment spending favouring the greening of the economy, aiming in particular to reduce air pollution, whose high levels pose severe health risks, as the current pandemic has shown.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020